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If you owe on an old debt and receive Social Security payments, you may be wondering whether that money can be taken to pay for the outstanding debt. Generally speaking, Supplemental Security Income (SSI) is protected by federal law. It’s a welfare program to support those who cannot care for themselves. If your Social Security is deposited into a bank account, a creditor with a judgment cannot execute against that account to satisfy the claim against you. There are exceptions, however.

If your Social Security income is from a disability award (SSDI) or Social Security retirement income, then it is not completely protected by federal law. Claims for taxes or other money owed to the government, child support obligations or student loan payments can be satisfied from this money.

Don’t Mix Your Money

For this reason, it is important not to mix your Social Security money into an account with money that comes from other sources, as it may become impossible to figure out which money is protected and what is not. When you mix your funds, you may lose it all to your creditors.

A Credit.com reader raised a different but related question: “Can a credit union setoff my account that contains Social Security money to pay an overdue credit card bill I owe to the credit union?”

The key word here is setoff. While it is a simple word, setoff is a difficult concept to describe. When you deposit funds with an institution like a bank or a credit union, that institution owes you that money. In effect, you are lending that money to the bank and in exchange, they pay you interest on that “loan.” Likewise, when you borrow money from that same bank, you have an obligation to pay them back. Setoff is the right to cancel out the obligations. Typically, you will see a bank take money out of your account to satisfy a debt that is owed to it.

Setoff is a creature of the common law with roots in ancient England. Most deposit institutions like banks and credit unions will also have an account agreement that will cover setoff. The deposit contract allows the bank to invade your account by withdrawing money and applying it to debts it is owed. Both the common law and deposit agreements seem to be contrary to the Social Security Act protections. This would mean the bank might take money out of your account that contains only Social Security funds.

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The Social Security Act & Setoff

Social Security funds are not entirely protected from setoff. Banks are not allowed to offset Social Security funds for just any money owed. The debt that is owed must arise from the same account relationship. This means that the debt must arise as the result of the deposit account. If the account where your Social Security money is deposited has incurred overdraft fees or account charges, then the bank or credit union can take money out of the account as an offset for those fees owed to it.

A bank or credit union cannot take money out of an account where only Social Security money is deposited as a setoff for other debts owed to it. If you have a credit card or loan account with the same institution that is not being paid, that institution cannot take money out of the account to pay it unless you authorize that transfer.

How Your Accounts Are Protected

Effective May 1, 2011, the U.S. Treasury has enacted certain steps that banks must take to safeguard Social Security funds, Veteran’s benefits, Federal Railroad retirement unemployment and sickness benefits, and Civil Service Retirement System and Federal Employee Retirement System benefits. When the federal government inserts an electronic “tag” in all direct deposits of exempted payments, the bank has to follow the regulation.

Within two business days after a bank receives a garnishment order from a court, it must review the customer’s account and determine what money in the account is exempt from seizure. Those payments cannot be frozen or garnished.

Banks are required to exempt all tagged deposits made during the two months prior to the receipt of any garnishment order and protect those deposits from garnishment.

Within three business days of receiving the garnishment order, the bank must provide the customer with the name of the creditor, the date of the garnishment and the amount of both protected and non-protected assets in the account.

Amounts owed for federal taxes and in response to state child support agencies cannot be protected from garnishment — even if they come from otherwise exempted federal sources. In other words, even under this new regulation, your Social Security or federal pension payments can be garnished to pay for overdue federal taxes or for child support.

As always, if you think that your accounts have been wrongfully setoff or garnished, you need to take action to protect them. Consult with a qualified lawyer to protect your rights.

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Gene Melchionne is a member of the Board of Directors of the National Association of Consumer Bankruptcy Attorneys. While he maintains a bankruptcy practice in Connecticut, he also speaks nationally on bankruptcy law and consumer representation. Formerly an officer of a local credit bureau, he has testified before the Connecticut legislature and various courts on consumer credit issues.

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